Extending competition in electricity transmission: Impact Assessment

Extending competition in electricity

Transmission Competition Policy

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0207 901 3160

Email:

TransmissionCompetition@ofgem.gov.uk

Overview:This document is an updated assessment of the impact of our decision to extendcompetitive tendering to onshore electricity transmission assets. It includesconsideration of the benefits, costs and risks, scenario analysis and distributional effects.We initially assessed impacts as part of the Integrated Transmission Planning andRegulation (ITPR) project, which supported our decision to introduce competitiononshore for new, high value and separable projects in March 2015.This updated impact assessment reflects our further understanding of impacts from ourprogress developing more detailed regulatory arrangements and from further evidenceand analysis from stakeholders. It continues to show there are considerable benefits toconsumers from extending competition onshore.

Extending competition in electricity transmission: impact assessment

2. BenefitsCapital and operational cost savingsInnovationDiversifying sources of labour and capitalFinancingThe early and late CATO build models

3. Costs and risks

Ofgem set up costsOfgem tender costsInterface costsPre-tender costs for the SO and TORisk of project delays and non-deliveryRisk to security of supply

4. Scenario analysisScenario AnalysisConclusions

5. Distributional effects and other considerations

Distributional effectsStrategic and sustainability considerations

334466

88991011

14141415161718

202024

252527

Appendix 1: Examples of competition in electricity transmission 28

North America and AustraliaGB offshore transmissionSouth America

Appendix 2: Scenario cost breakdown

283132

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Extending competition in electricity transmission: impact assessment

1. ApproachChapter SummaryIn this chapter we set out the background to our decision in March 2015 tointroduce competition to onshore transmission assets. We also outline ourapproach to assessing impacts.

Introduction1.1.We have decided to extend the use of competitive tendering to onshoreelectricity transmission assets that are new, separable and high value. We will runcompetitive tenders to identify parties to construct, own and operate theseassets. We made this decision in March 2015, as part of our IntegratedTransmission Planning and Regulation (ITPR) project. 11.2.In this document we assess the impacts of our decision. It is an update tothe assessment we made as part of the ITPR project, first in September 20142and updated in March 2015. In line with best practice, we are updating ourimpact assessment to reflect our most recent understanding of impacts.1.3.Our understanding has deepened as we have progressed with theimplementation of our decision. We have been developing the arrangements forcompetition and engaging with stakeholders, publishing proposals for consultationin October 20153 and alongside this document in May 2016. We have also beenworking with the Department of Energy and Climate Change (DECC) to supportthe development of draft legislation, published in January 2016. The Energy andClimate Change Committee carried out pre-legislative scrutiny of this legislation,publishing its report and recommendations in May 2016. 41.4.This updated assessment also takes into consideration two other impactassessments that have been published related to the introduction of competitiononshore. In January 2016, DECC published a regulatory impact assessment

Extending competition in electricity transmission: impact assessment

alongside draft legislation.5 Frontier Economics published an impact assessmentin January 2016, commissioned by National Grid Electricity Transmission.61.5.This impact assessment has been carried out line with the requirementsunder section 5A of the Utilities Act 2000, and was developed in line with our IAguidance.7

Rationale for extending competition

1.6.We have been competitively tendering offshore electricity transmissionlicences since 2009 and have seen significant benefits as a result. Applyingcompetitive pressure helps remove barriers to entry and reveal appropriate costs,thereby encouraging greater efficiency and innovation, ultimately leading tobetter value for consumers. We think by extending competitive tendering tocertain onshore assets there will be benefit for consumers. It is also in line withour duty to carry out our functions in a manner we consider best calculated tofurther our principal objective (which is to protect the interests of existing andfuture consumers), wherever appropriate by promoting effective competition.8

Extending competition in electricity transmission: impact assessment

1.9.Our analysis has shown that competing projects of this scale and scopewill bring larger benefits while minimising certain costs. As we discuss thebenefits and costs of the preferred option in this document and analyse projectscenarios, we consider the rationale for this restriction.1.10. Under the preferred option, incumbent parties continue to deliver onshoreprojects outside of these criteria under the RIIO framework. For these projects,the costs of competition are more likely to outweigh the benefits.Competition under different models1.11. Once we have decided that a project fulfils these criteria, we will run acompetitive tender to appoint a competitively appointed transmission owner(CATO) to construct, own and operate the assets. We are developing two modelsfor when and how we will do this.

Under early CATO build, we would run a tender to determine a CATO to

complete all necessary preliminary works (such as environmental impactassessments, high level asset design and securing planning consent), aswell as to construct and operate the transmission assets.

Under late CATO build, the SO or TO would complete all necessary

preliminary works and we would run a tender to determine a CATOresponsible for construction and operation.

1.12. During RIIO-T1, only Strategic Wider Works (SWW) projects that are highvalue, new and separable can be competed. For these projects we will use a lateCATO build model, as all SWW projects will be too far advanced for an early CATObuild tender by the time we are ready to run the first tenders. For projects thatbegin construction in RIIO-T2, all high value, new and separable projects will beeligible and we will choose to use either the early or late CATO build model whenwe decide whether to tender a project.1.13. There are different potential benefits and costs of the early CATO build andlate CATO build models which we explore in this impact assessment. In thescenario analysis in Chapter 4 we have focused our analysis on the late CATObuild model, in order to make consistent assumptions on costs and to reflect ourinitial focus on the development of this model.Generator variations1.14. There are two further variations to the preferred option, where a generatoris involved in the development of the project.

Under both the early and late CATO build models, preliminary works arecarried out by a generator rather than the SO or TO.

A generator builds the project before it is competed.

1.15. We have not yet decided whether to develop these variations and so havenot included them in the scope of this analysis. We recognise that they are a step5

Extending competition in electricity transmission: impact assessment

beyond our current plans and would assess their impact separately if consideringintroducing them in future.

Counterfactual1.16. As the counterfactual, we assume the continuation of currentarrangements for the delivery of new, separable, high value transmissionprojects. The three incumbent TOs would plan, construct, own and operate theprojects within their respective regions and this would be regulated under theRIIO arrangements. Where projects are significant network reinforcements, weassume that such projects would be delivered as SWW projects.Regulatory change without introducing competition1.17. In its analysis of the introduction of competition for onshore projects,Frontier Economics introduced a scenario where National Grid would deliver anonshore project under a project-specific regulatory arrangement, absent acompetitive tendering exercise. We considered whether we should take a similarapproach in designing a counterfactual, but have decided not to.1.18. Frontier Economics analysis asserts that under a scenario where NationalGrid (or another incumbent TO) delivers under a project-specific regulatoryarrangement, it can access debt markets as cheaply and efficiently as a CATOcould. We agree this could be the case, however a lower cost of finance is not theonly consideration in the selection of a bidder and not the only outcome we aretrying to achieve. Moreover, we believe it is a combination of the regulatorystructure and competitive pressure which encourages bidders to source the verybest debt terms for each project. Incumbents TOs will be able to bid in a CATOtender and so will potentially also be able to deliver the project under the sameregulatory package. We therefore do not propose an option or counterfactual thatincludes regulatory change without competition.

Our approach to assessing impacts

1.19. We have sought to assess the costs and benefits of the preferred optionquantitatively where possible. We have set out some illustrative quantitativescenarios in Chapter 4 and explained the level of benefits that would need to beachieved in order for the benefits to outweigh the costs. In cases where there islimited value in using numbers, since uncertainties would make it spurious to doso, we have given a qualitative description of our expectation and the relativesignificance of the costs and benefits.1.20. As part of our analysis, we have also used broadly comparative examplesfrom GB and other countries when assessing potential benefits in Chapter 2 andmaking cost assumptions in Chapter 3. These include the OFTO regime in GB andinternational examples of competition for onshore electricity transmission assets.These examples are not like-for-like comparisons with the arrangements we aredeveloping, however they are similar in approach in some cases, and all haveintroduced elements of competition. We draw relevant conclusions from themwhere it is appropriate to do so.

Extending competition in electricity transmission: impact assessment

1.21. Some stakeholders have expressed a desire for our assessment to be moreprecisely defined, with more analysis of longer term, whole system or whole lifebenefits and costs, covering a wider range of affected parties. This revision of ourimpact assessment goes further in the detail of our analysis of costs and benefitsand draws on additional evidence. However, we continue to take a generallybroader, qualitative assessment of the effects of competition, with somequantification where data is reliable.1.22. We consider this approach to be appropriate given the uncertainty over thedevelopment of the transmission network. While changes in the energy systemand the generation mix mean that new, separable and high value transmissionprojects are likely to come forward, it is uncertain how many will be needed andwhen. We have nevertheless been able to make some illustrative scenarios ofprojects coming forward based on generic assumptions about their size andfrequency.Assessing impacts on specific projects1.23. This impact assessment looks at the introduction of competitive tenderingas a long-term regulatory approach. Some stakeholders have suggested that wemay better define the case for competitive tendering through the use of projectspecific impact assessments. The Energy and Climate Change Committee, in itsscrutiny of draft legislation to support competitive tendering onshore, hasrecommended that the legislation be amended to direct Ofgem to introduceproject specific impact assessments. We are currently working with DECC tofurther consider the recommendation.1.24. We do not think that project-specific impact assessments are efficient orappropriate before making a decision to run a tender. For RIIO-T1 projects, wewill carry out additional assessment to confirm suitability for competitivetendering, looking at a number of factors, including the potential timingimplications of running a tender, the transferability of progressed works and thevalue of potential savings for consumers. For RIIO-T2, projects will be developedwith the competitive regime fully in place, and the decision for running a tenderwill be made earlier in the projects development, therefore parties will takeforward work aware that a competitive tender will be run. We consider it isimportant to provide this clarity and certainty to the parties responsible for doingwork and to the market as early as possible as this will help clarifyresponsibilities, provide confidence in our decisions/regulatory certainty, and helpdrive a more competitive market.

Extending competition in electricity transmission: impact assessment

2.1. We have assessed where extending competition is likely to bring benefits

for consumers. We have made a largely qualitative assessment of benefits,informed by a theoretical understanding of the benefits of introducing competitionand by experience of similar competitive regimes.2.2. It is particularly complex to quantify and monetise the efficiency anddynamic benefits of opening markets to competition, such as the scope ofincreased innovation and the introduction of new products, services andtechnologies. We draw on quantitative assessments of comparable competitiveregimes as an illustration, but do not make our own quantitative assessment.

Capital and operational cost savings

2.3. Competitive tendering will place downward pressure on capital andoperational expenditure. In regulating the incumbent TOs we have to estimatethe efficient cost of constructing and operating new projects, based on thefunding requests submitted to us by TOs. We can draw on independent expertiseand benchmarks from other projects, but this cannot completely resolve theproblem of information asymmetry where we do not know the true costs likely tobe faced by monopoly companies. This is particularly problematic in the electricitytransmission network, where new, high-value projects are specific in design andhistorically have not come forward often, making benchmarking difficult.2.4. Effective competition can enable efficient costs to be revealed. Within someset parameters of project scope and regulation, the pressure of competitionencourages parties to reveal the true cost of constructing and operating a project.Parties competing to be appointed as the CATO are likely to put forward lowercosts than an incumbent TO estimating the costs of constructing and operating aparticular asset under a traditional price control approach, where this competitivepressure is not at play. Cost discovery should also improve over successivetenders, as bidders gain experience, allowing them to price more competitively.2.5. The introduction of competition onshore may, over time, have downwardpressure on the capital and operational costs elsewhere on the onshore network,where the RIIO model is in place. Going forwards, when setting revenue for TOsunder RIIO price controls, we will be able to compare and benchmark, whereapplicable, proposed capital and operational costs with those that have beenachieved competitively.

Extending competition in electricity transmission: impact assessment

Innovation2.6. Competitive pressure and the involvement of new parties is likely to driveinnovation. On an individual project basis, innovation can result in lower costsand better value for consumers as bidders seek to create innovative and costsaving solutions in order to submit competitive bids. It also has wider benefits innovations adopted by one party may be relevant for the rest of the industry andcould help to drive down costs across the board, leading to benefits forconsumers.2.7.Depending on the tender model chosen, there may be progressiveinnovation in areas such as technology, design, supply chain management, theraising of finance and operations processes. Using examples from the OFTOregime, in financing, Greater Gabbard OFTO was the first UK and second EUproject to use the innovative European Investment Bank (EIB) project bond creditenhancement (PBCE) product,9 reducing the cost of capital and providing value toconsumers. In technology development, TC Ormonde OFTO Ltd has been awardedfunding through the 2014 Network Innovation Competition to develop an offshorecable repair vessel and universal cable joint.10 This is intended to reduce the costof offshore maintenance and produce benefits for consumers. We envisage CATOshaving access to the Network Innovation Competition, which will facilitate similarinnovative outcomes.

Diversifying sources of labour and capital

2.8. Opening up investment opportunities to new parties allows differentsources of labour and capital to enter the industry. New and prospective entrantsin transmission network ownership could bring with them engagement from newsuppliers, contractors, and financiers. This diversification should drive innovationand cost reduction through the supply chain and across different aspects of theproject.2.9. The involvement of new parties also enables us to increase the number ofdata sources we can use to benchmark the cost submissions of TOs and othertransmission developers when deciding on the allowed revenue for a particularoutput. This will improve the reliability and accuracy of our assessment ofefficient costs, although there will continue to be a need to take into accountproject-specific factors.2.10. Some incumbent TOs have told us they think the scope for diversifyingsources of labour and capital (and for competitive pressure in procurementpractices more generally) is limited, given they already have competitiveprocurement practices in place. We see further potential gains from appointingthe TO competitively - the CATO could bring in new suppliers, broadening the

Extending competition in electricity transmission: impact assessment

market, as well as efficiencies in their negotiation and management of suppliers.As CATO bidders naturally seek to improve their own competitiveness, they arelikely to drive increased value from the supply chain.

Financing2.11. We would expect bidders in a competitive process to put forward financingsolutions that provide value for money to consumers. Competition will bear downon the cost of equity and debt, as bidders seek out investors and lenders. Bidderswill look for the most efficient financing structure, including gearing, to reflect therisk of delivering the project.2.12. CATOs will have long-term revenue certainty, potentially over 25 years, asset out in our October 2015 consultation. We expect this will facilitate higherlevels of gearing than would otherwise be possible under a traditional pricecontrol approach. This enables the market to determine a cost effective, projectspecific financing solution. As part of our assessment of bids, we will evaluate thefinancing solutions put forward. We will be looking to ensure that the level ofgearing will lead to a robust and financially stable CATO, with costs of debt andequity at competitive terms.Experience of financing for OFTOs2.13. The experience of the offshore transmission regime is that bidders havebeen able to draw finance from a range of new sources and achieve financingsavings over a traditional price control approach. There have also been significantoperational cost savings. These savings have improved over successive tenderrounds.2.14. CEPA consultants analysed the estimated savings from the OFTO regime,including in financing and operations.11 CEPA noted some possible reasons for thefalling cost of capital for OFTO projects. It is partly due to a reduction inunderlying wholesale finance market rates between 2010 and 2015, but also dueto improvements in debt financing terms that the OFTOs have been able tonegotiate, benefits OFTOs can receive from inflation linked financing and lowerrates of return required by equity providers working in the sector.2.15. Fluctuations in market rates for finance aside, over time, a similardownward trend in financing costs, and potentially also in operating and capitalcosts, could be conceivable for CATOs as the competitive tendering regimebecomes more established, confidence grows among bidders and competitionbecomes more fierce.2.16. While we expect that competition onshore will drive efficient financestructures and bear down on the cost of debt and equity in a similar way tooffshore, CATO financing will differ in certain respects to that of OFTOs. OFTOs to

11

CEPA, Evaluation of OFTO Tender Round 2 and 3 Benefits, March 2016:

https://www.ofgem.gov.uk/publications-and-updates/evaluation-ofto-tender-round-2-and3-benefits. More detail in Appendix 1.

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Extending competition in electricity transmission: impact assessment

date have assumed ownership of assets that have already been constructed.CATOs financing costs may not match those achieved in the OFTO regime giventhe additional exposure to construction risk. The early CATO build model mayexperience higher financing costs than the late CATO build model, due to therequirement to obtain relevant consents.2.17. Where a material construction risk premium applies, CATOs may re-financeonce the asset has been constructed. As set out in our October 2015 consultation,we may introduce a debt refinancing gain share mechanism for CATOs to ensureconsumers capture a reasonable proportion of any benefits. CATOs may also beable to structure debt during the construction phase more efficiently than offshoregenerators have done to date under the OFTO regime (where we set a cap on theinterest during construction that an offshore developer can receive). Both of thesefactors may facilitate relatively close alignment between CATO and OFTOfinancing costs, particularly under late CATO build.

The early and late CATO build models

The early CATO build model2.18. An early tender model carries potential bidder risks and uncertainties whichimpact the certainty of bid pricing. Risks may arise from consenting andsurveying activity, or where there is a change in system need, requiringfundamental redesign of a project scope or even ultimately resulting in there nolonger being a need for the project.2.19. However, the potential risks and uncertainties of the early model arebalanced against significant potential benefits; there is more scope for innovationin high level design, preliminary works and technology choice, widening thepotential efficiencies that bidders could bring.2.20. The use of broadly similar early build tender models in electricitytransmission internationally gives some indication of the potential for savings. Welooked at the following early model examples from North America:12

On the Fort McMurray West project in Canada, the winning bid wasapproximately 20% below that of the original project cost from theincumbent network owner.

On the East-West Tie line, also in Canada, the winning bid was 33% lowerthan the SOs original estimate and 22% lower than the incumbents bid.

On the Artificial Island project in the USA, where multiple bidding roundswere used, the winning bid was 60% lower than the lowest initial bid fromthe incumbent.

12

Further detail on these examples, including an explanation of the savings calculation anddata sources are given in Appendix 1.

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Extending competition in electricity transmission: impact assessment

2.21. These examples point to the potential for considerable cost savings. Wecannot be conclusive that similar benefits will occur under an early model in GB;planning law and processes are different, and there is significant uncertainty inthe generation background driving the need for and scope of future transmissioninvestment in GB. This means the risk profile during the project developmentperiod in GB is not directly comparable to other jurisdictions where the earlymodel has been used. Further, the above examples are based on winning bids forprojects rather than outturn costs following construction. There is some flexibilityfor allowed costs to change under these early build models, to cope withuncertainties.The late CATO build model2.22. A late CATO build model should be more effective than the early model inrevealing true costs in construction management, operations and managementand financing. Given the more defined scope of the project being competed, weanticipate clearer, and in turn more competitive, pricing from bidders. This effectis further strengthened by the fact that some risks in preliminary works activities,including in securing planning consents, will no longer be present by the time ofthe tender.2.23. The similarity of the late model to existing public procurement practices inGB, particularly to the OFTO and PPP/PFI regimes, means there will be somefamiliarity and experience among potential bidders and investors. This couldresult in a greater understanding of risks, more competitive pricing, and apotentially larger pool of bidders. The late CATO build model may therefore beable to deliver benefits more readily in the short term than the early CATO buildmodel.2.24. There is a relatively limited number of examples, and they are not whollycomparable to the proposed GB arrangements. However they do indicatepotential benefits:

13

The generator-build OFTO regime in GB, which could be considered a very

late tender model for a constructed asset, has seen progressiveimprovements over tender rounds in operational and financing savingscompared to a theoretical non-competitive regulated approaches. Thesesavings, for projects in all tender rounds to date, are estimated at 23-34%of the value of the projects.13

Internationally, there is some evidence from Australia of tenders being run

where bidders were not responsible for obtaining planning consent andland rights. However, we do not consider that the available data issufficiently robust to allow us to quantify the benefits of tendering.

Based on data from CEPA, Evaluation of OFTO Tender Round 2 and 3 Benefits. Furtherdetail of CEPAs findings and methodology are in Appendix 1.

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Extending competition in electricity transmission: impact assessment

2.25. Beyond the transmission sector, we believe the low cost of capitaldelivered by tendering the Thames Tideway project demonstrates the potentialfor competition to drive consumer benefits under a late type tender model in GB.While there were many features that influenced the extent of construction riskbeing taken on by the winning bidder, which we are not proposing to implementfor CATOs, the winning bid WACC14 of 2.497% was substantially below theoriginal estimate of 3.29%.15 .2.26. The Thames Tideway project is a relevant example of a tender being runwhen preliminary works (including procurement of construction contracts in thiscase) are already in place. It demonstrates that significant consumer benefits canbe realised, despite there being less scope for design innovation. However, we donot expect to replicate these financing costs for CATO projects given that ourproposed regulatory construct and risk allocation is different.

14

Weighted average cost of capital

See for example: http://www.oxera.com/Latest-Thinking/Agenda/2015/The-ThamesTideway-Tunnel-returns-underwater.aspx15

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Extending competition in electricity transmission: impact assessment

3. Costs and risks

Chapter SummaryIn this chapter we estimate the costs associated with extending competition toonshore electricity transmission networks. We also consider the potential risks.

3.1. We have estimated the costs of introducing competitive tendering to new,

separable, high value onshore projects. On the basis of our experience with theoffshore transmission regime, we are able to estimate certain costs, particularlyto Ofgem and bidders in the tender process, which we think are broadlycomparable. For all other costs, we have made estimates based on our continueddevelopment of, and consultation on, competitive arrangements onshore. Wehave treated costs as the incremental costs over the counterfactual and so haveallowed for costs that would be saved from activities under the counterfactualthat are no longer needed.

Ofgem set up costs

3.2. Ofgem will incur costs in setting up the onshore competitive regime, whichit is anticipated will largely build on the systems and processes of the offshoreregime. There are however a number of new costs associated with the design ofnew regulatory arrangements for onshore competition.3.3. We estimate that Ofgem will incur set-up costs of 2.5-3.0m beforelaunching the first tender, regardless of the subsequent volume or frequency oftenders. These costs will be passed through to NGET and ultimately suppliers,generators and consumers through network charges.

Ofgem tender costs

3.4. Ofgem incurs costs in managing competitive tenders. These relate broadlyto staffing, technology and external advice on legal, technical and financialmatters. Ofgem tender costs from OFTO Tender Rounds 1, 2 and 3 wereapproximately 1% of the Final Transfer Value of the assets. Based on this, weestimate these costs for CATO tenders to be 1% of the capital value of projects.3.5. We recognise that running a tender for a CATO will be different to an OFTOin some respects. We will face additional costs to assess construction proposals,but will avoid costs at the point when the asset is constructed, in cost assessmentand facilitating due diligence. We would also have a reduced workload on SWWassessments, when comparing to the counterfactual. Although the size andpipeline of projects to be tendered onshore is uncertain, it is reasonable toconclude from current planned SWW investments that individual projects couldhave values over 500m, larger in size than previous OFTO projects. There arelikely to be economies of scale with tendering larger projects. In the round, wethink that 1% of capital costs is a reasonable long-run estimate for CATO tenders.

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Extending competition in electricity transmission: impact assessment

Bidder costs3.6. Bidders will incur costs when preparing bids, engaging with the supplychain, and, in the case of the successful bidder, engaging in the processesrequired ahead of taking over the project (such as further due diligence andtransaction costs in acquiring the preliminary works). Based on our experience ofthe OFTO regime, we estimate the cost to the successful bidder at 2% of thecapital value of a project. The successful bidder can recoup these costs throughits revenue, which is collected from suppliers and generators throughtransmission charges and ultimately passed through to consumers.3.7. Successful bidder costs from OFTO Tender Round 1, 2 and 3 ranged fromapproximately 1-3% of the Final Transfer Value of the assets. These costs maydiffer for CATO tenders. There will be additional costs in putting together a bidthat includes construction, but due diligence on constructed assets will beavoided. As with Ofgem tender costs, there are also potential economies of scalefor projects larger than we have seen for OFTOs. In the round, we consider thatan estimate of 2% is an appropriate long-run average for CATO tenders.3.8. Unsuccessful bidders will also incur bid costs and these will vary dependingon the tender stage which the bidder reaches. In contrast to successful biddercosts, these costs remain with the unsuccessful bidder and are not passed on. Toa degree, these costs could be factored into future bids if the unsuccessful bidderbids in multiple tenders; however, the bidder would need to weigh this againstthe lower chance of winning a subsequent tender.

Interface costs3.9. Interface costs are incurred where TOs, the SO and DNOs interact in theiractivities to operate and maintain the network. We have considered these in tworespects:

Inefficiency at interfaces - Poor management of interfaces can

result in suboptimal management of capacity, system operation,outage planning and maintenance programmes. These costs would beborne by TOs, SO, suppliers and generators both through networkcharges and as a result of any lost opportunities in the wholesalemarket.

Cost of managing interfaces - In order to minimise costs of

inefficiency at interfaces, service agreements, coordinationmechanisms between parties and monitoring processes are put inplace. While these mechanisms minimise the potentially significantcosts of inefficiency, there are costs associated with their set up andimplementation. They would fall to TOs and SOs, but ultimatelypassed through to consumers through network charges for suppliersand generators.

3.10. When a new CATO is added to the network, it creates additional interfaces.Since only new and separable projects will be competed, the number andcomplexity of interfaces for a CATO will be minimised.

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Extending competition in electricity transmission: impact assessment

3.11. Industry codes, standards and processes already in place to manageinterfaces between multiple parties can be extended to CATOs. Assuming theeffectiveness of these existing processes, and the separable nature of a competedproject, we consider that there would be no or limited additional costs frominefficiency at new CATO interfaces. We do not expect there to be a materialadditional cost of managing interfaces since mechanisms are already in place.3.12. We assume, as a base case that interface costs will be zero. There arealternative views that additional interfaces costs could be more significant,including certain costs put forward by Frontier Economics in its analysis. Althoughwe have not seen persuasive evidence to support this view, for completeness wehave carried out a sensitivity analysis with higher interface costs alongside ourscenario analyses in Chapter 4.

Pre-tender costs for the SO and TO

3.13. We expect that the incumbent TO, or potentially the SO from RIIO-T2, willincur additional costs under a late CATO build model, in undertaking preparatorysteps in advance of a tender and supporting the tender process once commenced.3.14. We have made generic cost estimates, for the purpose of this impactassessment. For any future project that is tendered, we will make an assessmentof efficient costs incurred by the incumbent TO or SO. The estimates here do notprejudice those assessments.TO costs under the late CATO model3.15. In RIIO-T1, the pre-construction elements of an SWW project will continueto be carried out by the incumbent TO and have previously been funded as part ofRIIO. Under the late CATO build model, we are proposing that the TO alsoproduces and maintains a tender specification, compiles and submits documentsto the project date room and responds to bidder due diligence enquiries. The TOcould also be required to undertake additional preliminary works, such asadditional survey activity, where this would improve the robustness of bidassumptions.3.16. These additional costs will be partially offset against costs to theincumbent TO in the counterfactual that are avoided particularly the preparationof an SWW project assessment submission for Ofgem. We think the additionalpre-tender costs for a TO are limited, and estimate it at c1m per project.SO costs under the late CATO model3.17. Under the late CATO build model in RIIO-T2, we have previously proposedthat the SO could carry out the same activities before and during the tender thata TO would in RIIO-T1, both in terms of preliminary works and any additionalwork to support a tender. We are still considering this proposal in the context ofthe SOs wider role and incentive framework. For the purpose of this impactassessment, we have assumed the SO carries out these activities and incurs thecosts, however we are yet to confirm that as our final position.

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Extending competition in electricity transmission: impact assessment

3.18. Assuming the SO carries out this role, this would mean:

A redistribution of preliminary works costs from incumbent TO to SO

representing a new cost to the SO.

SO activities to support a tender, as described above for the TO, and

incremental to the counterfactual, are likely also to cost 1m perproject.

Given that the SO currently does not carry out preliminary works, asTOs currently do, we estimate SO incremental costs could be higherfor the first project, estimated at 2m, to reflect the need to put skillsand processes in place, dropping to c. 1m for subsequent projects.

SO and TO costs under the early CATO model

3.19. Under the early CATO model in RIIO-T2, the CATO will take forward thepreliminary works and so the cost of those works is redistributed from theincumbent TO to the CATO. For the SO, there will be some costs involved insupporting the tender process and providing information to bidders. Given theprojects early stage of development, we expect these would be less than 1m.

Risk of project delays and non-delivery

3.20. For high-value projects over 100m, delay or cancellation of a projectcould result in considerable costs. The CATO or TO may incur higher constructioncosts, or indeed sunk costs in the case of non-delivery. The SO may incur higherconstraint costs. Both the CATO or TO and affected generators could incurincreased financing costs where the risk profile of the project is perceived toincrease.Managing existing risks3.21. Delay or non-delivery could occur for a number of reasons at differentstages in a projects development, independent of whether a competitiveapproach is used. For example, there could be changes in the need for theproject, unforeseen ground conditions or extreme weather events. We plan todevelop regulatory arrangements, to be reflected in licences and industry codes,that both encourage the management of delay and cancellation risks by partiesinvolved, and where appropriate share risks that cannot be efficiently managedwith consumers.3.22. While these risks under a competitive regime are consistent with thecounterfactual, risk will transfer to the CATO at an earlier or later point dependingon the tender model. Under an early CATO build model, there is greater risk thatthe need for the project will change after the tender is run, compared to the lateCATO build model. In such a scenario, we may compensate bidders or CATOsaccordingly, depending on the point in the tender process at which the need fallsaway.

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Extending competition in electricity transmission: impact assessment

Managing new risks3.23. There are potentially new sources of delay or non-delivery risk due to theaddition of the competitive process itself, or due to the CATO being less capableto deliver the project. This was an observation of the Energy and Climate ChangeCommittee in its scrutiny of possible legislation to support onshore competition.We are introducing policies to mitigate these risks and avoid potential costs.

When deciding whether to run a tender for a project in RIIO-T1, in

addition to considering whether projects are new, separable and highvalue, we will also consider the effects of tendering projects whereincumbent TOs have already undertaken significant pre-constructionwork. We will consider the timing implications of any decision totender, the transferability of works undertaken by the TO to theincoming CATO, as well as the value of potential savings forconsumers.

From RIIO-T2 onwards, we will have established arrangements for

For all tenders, we have flexibility to run our processes in parallel

Our selection of the CATO will take into account the CATOscapabilities, expertise and the credibility of their proposed timelines.

We will encourage efficient and timely construction by starting the

CATOs revenue on completion of construction.

As a contingency measure against non-delivery, we are developing a

CATO of last resort mechanism.

Risk to security of supply

3.24. We do not expect the risk to security of supply for GB consumers to beincreased through competing new, separable, high value onshore transmissionprojects. Some stakeholders have raised concerns that the proposed regime mayhave detrimental impacts on security of supply, caused by project delays andcancellations (discussed above), by encouraging poorly constructed or poorquality assets, or by increasing system fragmentation and interfaces in thenetwork (discussed above).3.25. There will be arrangements in place to minimise these sources of securityof supply risk. As discussed, we expect industry codes and processes to manageinterfaces effectively and, also discussed above, we are introducing policies tominimise any risk of project delay that may be introduced.3.26. To address the risk that the CATO does not construct or operate its assetsto an acceptable standard, we will assess closely the capabilities of bidders andthe robustness of their proposals. Once appointed, CATOs will have enforceable18

Extending competition in electricity transmission: impact assessment

licence obligations regarding the maintenance of the transmission asset. We willhave incentives in place (eg an availability incentive, amongst other possibleincentives) to ensure the CATO networks are providing a secure supply ofelectricity. We will also ensure that CATOs are subject to relevant technical andsystem standards and codes.

19

Extending competition in electricity transmission: impact assessment

4. Scenario analysisWe estimate costs for illustrative project scenarios and present theseproportionate to the size of the total investment.

Scenario AnalysisApproach4.1. The uncertainties around the pipeline of projects meeting our criteria forcompetitive tendering and the exact costs and benefits mean that we do notconsider that it is possible to arrive at a single monetary estimate of the impact ofcompetitive tendering. Certainty regarding the costs and benefits is also mademore difficult by the limited comparable regimes from which we can draw reliableexisting evidence.4.2. Instead, we have outlined some scenarios to demonstrate the potentialscale of some costs and benefits, using justified assumptions. The scenariosassume a particular number of projects of a particular size are competed over adefined timeframe. We assume that these projects are new, separable and highvalue, in line with our preferred option. We recognise that these scenarios areillustrative and not exhaustive.4.3. We have assumed under all scenarios that the late CATO build model willbe used. This is indicative of the short-term (ie during RIIO-T1), however the useof the early CATO build model from RIIO-T2 is possible.Cost assumptions4.4. The cost assumptions in the scenario analyses are based on ourassessment of costs described in the Chapter 3:

20

Ofgem set-up costs 3m. We have adopted the higher range of

our estimate, as a conservative assumption of cost. This cost is fixedregardless of the number and size of projects.

Ofgem tender costs 1% of the capital value of projects.

Bidder costs 2% of the capital value of projects.

Extending competition in electricity transmission: impact assessment

SO costs covering possible pre-tender activities, 2m for the first

project, 1m for subsequent projects, applicable from RIIO-T2(2021).16

TO costs covering possible pre-tender activities, 1m per project,

applicable in RIIO-T1 (until 2021).Scenario assumptions

4.5. Our scenarios are underpinned by assumptions on timing and number of

projects tendered. We have constructed two groups of scenarios and madeassumptions on timing.

Scenario group 1 This group looks at variances in project number.

Each scenario assumes a project size of 500m, a choice looselybased on the size of projects we think may come forward under RIIOT1 SWW. We assume a consistent two year gap between when eachproject is tendered. Each scenario has a different number of projectscoming forward 1, 2, 3 or 4.

Scenario group 2 This group looks at variances in project size

across the RIIO-T1 and RIIO-T2 period. Each scenario in the groupassumes a single project of 500m tendered immediately followingset up of the scheme in the RIIO-T1 timeframe, in line with ourestimates of project size for this period, and two projects in the RIIOT2 timeframe (where tender processes begin in 2021 and 2023).Each scenario has a different value for each RIIO-T2 project - 100m,500m or 1bn.

Project groupings and number in both groups of scenarios we

assume each project will have a separate tender process, to reflect asituation where projects come forward at different times and areunable to be grouped into rounds as we have done for OFTOs. Wehave only modelled 3-4 projects per scenario for simplicity, althoughmore projects may be competed beyond that.

Timeline under both groups of scenarios, we assume 2015 as a

start year for scheme set up, with the first tender starting in 2017.We assume two years for scheme set up, when Ofgem set up costswill fall. Then for each project, we assume two years for the tenderprocess, when Ofgem tender costs, bidder costs, and SO/TO costs willbe incurred and then three years for construction.17 We assume 25years of CATO operation, when interface costs will be incurred(modelled in a sensitivity analysis).Set up

Firsttender

Construction

2 years

2 years

3 years

Operation25 years

16

Assuming SO carries this role out in RIIO-T2

We make slightly different generic timing assumptions to that of DECC in its impactassessment.17

21

Extending competition in electricity transmission: impact assessment

CalculationsTotal costs4.6. In each scenario, we calculated each cost element in net present valueterms (2015 prices) and totalled them.

For Ofgem tender costs and bidder costs, the cost was calculatedfrom a percentage of the capital value of the projects in eachscenario. The values given to the projects in the table are capitalvalues on construction in constant prices. These were discounted at arate of 3.5% to give their present value, of which a percentage wascalculated.

For costs that are expressed as monetary values in our assumptions

(Ofgem set-up costs, SO costs and TO costs), these costs areassumed as constant and profiled along expected timelines. They arethen converted into net present value using a discount rate of 3.5%.

Costs as a percentage of asset value

4.7. The total costs in a scenario, in net present value terms (2015 prices) areexpressed as a percentage of the value of all the projects in a scenario, also inpresent value terms.ScenariosTable 1: Scenario group 1

Scenario

OneProject of500m

TwoProjectsof 500m

ThreeProjectsof 500m

FourProjectsof 500m

Total costsIncludes Ofgem set upcost, Ofgem tender costs,bidder costs and SO andTO costs

Costs as a percentageof asset value

22

16.5m

29.2m

41.8m

52.8m

3.92%

3.58%

3.54%

3.46%

Extending competition in electricity transmission: impact assessment

Table 2: Scenario group 2

Scenario

RIIO-T1: Oneproject of500m

RIIO-T1: Oneproject of500m

RIIO-T1: Oneproject of500m

RIIO-T2: Twoprojects of100m

RIIO-T2: Twoprojects of500m

RIIO-T2: Twoprojects of1bn

Total costsIncludes Ofgem set upcost, Ofgem tender costs,bidder costs and SO andTO costs

Costs as a percentage ofasset value

23.1m

40.1m

61.4m

4.10%

3.55%

3.34%

Sensitivity analysis of interface costs

4.8. We have assumed that interface costs in the above scenarios are zero. Asmentioned in Chapter 3, arguments have been made by others that they could behigher. Taking a central scenario from each of the scenario groups as a basecase, we have modelled two sensitivities where there are interface costs.

The first assumes that interface costs are 3m for the first projectand 1.5m for each subsequent project. This is based on anassumption that some efficiencies in management of interfaces will bemade after the first project. We consider that this represents a highvalue assumption for any potential additional interface costs.

The second assumes that interface costs are 0.25% of the capitalvalue per annum, the estimate used by Frontier Economics in itsanalysis. We dont think this a valid assumption as we dont considerthat there is any direct linear correlation between project size andnumbers/complexity of interfaces, however we have included it forcompleteness.

4.9. The following table shows the effect that higher interface costs have oncosts as a percentage of asset value, in net present value terms.

23

Extending competition in electricity transmission: impact assessment

Table 3: Interface costs sensitivity analysis

Scenario

Three Projectsof 500m

RIIO-T1: Oneproject of500mRIIO-T2: Twoprojects of500m

Costs as a percentage of asset value

3.54%

3.55%

3.79%

3.81%

7.51%

7.53%

No interface costsCosts as a percentage of asset valueIncluding interface costs of 3m for firstproject, 1.5m for each subsequent projectCosts as a percentage of asset valueIncluding interface costs of 0.25% of assetvalue per year

Conclusions4.10. In the scenarios that we have modelled, the cost of introducingcompetition onshore is estimated at 3.3-4.1% of the value of projects involved.The analysis also shows that scenarios with lower value projects have relativelyhigher costs, supporting the restriction of competition to high-value projects.4.11. Our qualitative assessment of benefits highlights the potential for thesecosts to be outweighed by savings made in capital, operation and financing costs.The OFTO regime has been estimated to have brought consumers net savings of23-34% of the value of OFTO projects, when compared to regulatedcounterfactuals.18 Although a direct read across is not possible to onshoreprojects, this provides a strong indication that competition in GB electricitytransmission can bring significant savings. Even if savings were to be half as highonshore in percentage terms, this would be well above cost thresholds we havemodelled in these scenarios, and also above those in the higher interface costsensitivities.

18

24

More detail on these savings in Appendix 1

Extending competition in electricity transmission: impact assessment

5. Distributional effects and other

considerationsDistributional effectsOfgem5.1. We have highlighted in Chapter 3 costs for Ofgem of the set up andrunning of a competitive process. These costs fall directly on Ofgem but arepassed through to NGET (for set up costs) or to the CATO (for tender costs) andultimately onto consumers through network charges on generators and suppliers.Incumbent TO and the SO5.2. Extending the use of competitive tendering may result in some projectsbeing developed by a new CATO rather than by the incumbent onshore TOs. Insuch cases the incumbent TO would not receive the regulated returns for thatinvestment.5.3. As highlighted in Chapter 3, under a late CATO build model, the incumbentTO faces some additional costs to carry out activities to support the tender inRIIO-T1. We have yet to confirm who will carry out these activities in RIIO-T2,but we have used the assumption in this assessment that it could be the SO. Weare currently proposing that these costs will be passed on to the CATO, which itwill recover from generators, suppliers and ultimately consumers through networkcharges.Bidders5.4. We highlighted the costs to bidders in Chapter 3. These remain with thebidder, unless it is successful, when it recovers these costs as part of its revenue,collected through network charges. Bidding costs are an additional cost toincumbent TOs, if they choose to participate.CATOs5.5. New CATOs will benefit from the opportunity to develop onshoretransmission assets, and receive regulated revenue for doing so. This will berecovered through network charges.Supply chain5.6. Companies and individuals supplying goods and services in theconstruction and operation of transmission assets may face increased costs fromengaging with an increased number of parties, as they engage with bidders andpotentially an increased number of TOs. However, this also benefits supply chaincompanies by widening business opportunities.

25

Extending competition in electricity transmission: impact assessment

Generators and demand users5.7. If competition lowers the overall networks costs, as we anticipate, costsfaced by generation and demand users through network charges will be lower.We have highlighted potential risks to generators of project delays in Chapter 4,however we expect these to be mitigated through our regulatory policies.Consumers5.8. Costs falling directly on Ofgem, incumbent TOs, the SO or CATOs arerecovered through transmission network charges on generators and suppliers,who in turn will pass these network costs on to consumers. Similarly, capital,operation and financing savings that we highlighted in Chapter 2 will be passedthrough to consumers in the same way. We believe there will be a net saving forconsumers.5.9. We do not foresee any additional impacts of our decisions on vulnerableconsumers as a subset of GB consumers. However, consumers who have lowerincomes will see greater relative improvements in the affordability of theirelectricity.Geographic distributional impact5.10. Projects across GB can be tendered. We cannot say at this stage whichprojects in which locations are likely to progress, as this is dependent onchanging need and generation background.5.11. Where a competed project is located has an effect on generators. Whatgenerators pay to use the transmission network is determined by factors such asthe configuration of the system at a particular location, the design of thegenerator connection and the cost of the reinforcement to the local network andany wider reinforcements required. We would expect generators closer to a CATOto benefit more from reduced network charges. However, transmission chargingdoes not pass through cost savings in only a localised fashion. Savings from aparticular CATO project would also be passed on to all users (both generation anddemand), including those in regions other than where the CATO is located.5.12. We may run a tender for projects during the RIIO-T1 period if they are ator above the 100m threshold and they are SWW projects. Since the valuethreshold for a SWW project in England and Wales is higher, at 500m, there aredifferent thresholds between England and Wales and Scotland. Depending on theprojects that come forward, the different thresholds may or may not lead todifferences in the size of projects that are tendered in the two regions. Anypotential for this is restricted to the short term, up until 2021 and is alsodependent on the size and timing of projects being developed.

26

Extending competition in electricity transmission: impact assessment

Strategic and sustainability considerations

Low carbon electricity5.13. Much of the anticipated transmission investment over the coming decadesis aimed at ensuring the transmission system enables low carbon electricitygeneration and use. On the whole, we expect the introduction of onshorecompetition to decrease the costs of this investment. These impacts wouldcontribute to reducing the overall costs of moving to low carbon technologies,assisting with their deployment and use in GB.Environmental impacts5.14. We have also considered whether there would be any difference in how aCATO manages and mitigates environmental impacts, landscape visual impactsand other impacts on communities, compared to an incumbent TO. Somestakeholders have raised concerns over the CATOs ability and willingness in thisregard.5.15. Overall, we would not expect this to be materially different. We understandthat the planning consent process places important obligations on projectdevelopers and we would expect CATOs to comply with them. We will alsodevelop a robust tender process that selects appropriately qualified parties whowill be able to take on the responsibilities and obligations of being a CATO,including those relating to managing environmental and other impacts. We arealso considering what obligations and incentives should be placed on CATOs tomanage these impacts in the longer term.5.16. There are differences in the planning regimes in England, Wales andScotland. We think that robust arrangements can be put in place across allplanning regimes in due course. As we develop the arrangements to introducecompetition, we plan to say more about their interaction with planning regimes.

27

Extending competition in electricity transmission: impact assessment

Appendix 1: Examples of competition in

electricity transmissionThere are examples of where electricity transmission tendering has led tobenefits, both in GB and abroad. Legal and regulatory frameworks, as well asplanning regimes, differ from country to country and each example differs inaspects of what is competed and how. We cannot therefore expect exactly thesame benefits and costs from introducing competition for onshore transmission inGB. Nevertheless, similarities in approach mean we can compare themes andtrends, to give indications of the potential for benefits onshore in GB.

North America and Australia

Competition was introduced in these examples into already well-developedelectricity networks with established regulatory and legal frameworks. Theytherefore provide useful reference points, however the models introduced differ incertain aspects to our planned arrangements for onshore competition in GB.Table 4: North American and Australian examples

The successful bidder for the Fort McMurray

West project was selected based on a bid of$1.43 bn Canadian for project life costs.This compares favourably to AESOs originalestimate of $1.8 bn Canadian for capexcosts alone. The estimated cost achievedthrough competition was thereforeapproximately 20% lower.19

Extending competition in electricity transmission: impact assessment

Example and description

Ontario, CanadaAn early stage tender of the EastWest Tie line. The need for theinvestment was identified by theregulator and OntariosIndependent Electricity SystemOperator (IESO).

The selected bidder proposed development

and capital costs of c.$400m Canadian. Thiscompares to an estimated capital cost fromthe SO before the competition of $600mCanadian and a bid of c.$513m Canadianfrom a local incumbent as part of a biddingconsortium. The winning bid was therefore33% lower than early estimates and 22%lower than the local incumbents bid.20

An initial cost estimate of US$4.9bn for a

programme of 109 projects was made,however, 168 projects have been completedat an estimated cost of US$6.9bn.21Underestimation in the scale of theprogramme makes cost comparisonsdifficult. We understand that all requiredprojects have been completed withoutsignificant delays.

20

Ontario Energy Board. Initial project estimates:

http://www.ontarioenergyboard.ca/OEB/_Documents/Documents/EWT_OPA%20_Report_20110630.pdf; Bid data: http://www.ontarioenergyboard.ca/oeb/_Documents/EB-20110140/Dec_Order_Phase2_East-WestTie_20130807.pdf21North American Wind Power report on CREZ:http://www.nawindpower.com/online/issues/NAW1307/FEAT_01_Nearly_Completed_CREZ_Lines_Unlock_Wind_Congestion.html

29

Extending competition in electricity transmission: impact assessment

Table 4 (continued): North American and Australian examples

Example and description

Benefits

Artificial Island, PJM (USA)

The winning bid was US$275m, after several

bidding rounds. The comparator here is theinitial bid of the incumbent of 692m, as theclosest to a non-competitive price that isavailable (although there was somecompetitive pressure from the first biddinground). The winning bid was approximately60% lower.22

PJM (the Independent System

Operator for 13 states and thedistrict of Columbia) ran an earlystage competitive tender to selecta transmission owner to develop,build, finance own and operate theArtificial Island project.

Victoria, Australia2324The Australian Electricity MarketOperator (AEMO), has competedtransmission projects in Victoriathat are separable from thenetwork. It makes projectrecommendations and initiatesprocurement before a tenderwhere bidders compete on priceand capabilities.

22

The technical proposals included a wide

range of technologies demonstrating thepotential scope for competition to driveinnovation in design. One of the maininnovations realised through the tenderprocess was the introduction (bidderinitiated) of caps on project costs.By mid-2013, 13 out of 15 projects hadbeen awarded to the incumbent. We havenot been able to source cost data to studyany change to costs estimated before thetender. Despite there being few newentrants, it has been suggested by somestakeholders that efficiency has beenachieved by removing the incentive on theTO to overstate investment needs.In the case of one project we looked at, theHeywood Terminal Station upgrade, there isevidence of planning consents having beenobtained before the tender, making thiscloser to our late CATO build model.25

Extending competition in electricity transmission: impact assessment

GB offshore transmissionCompetition for offshore transmission in GB is well established and to date, therehave been three tender rounds under the generator-build model, wherecompetition is for ownership and operation of a constructed asset. We recentlycommissioned CEPA consultants to analyse the savings that have been achievedin financing and operations, relative to theoretical counterfactuals. The findinghere are taken from that analysis.26Of the theoretical counterfactuals that CEPA compared the offshore competitiveregime to, two were regulated price control counterfactuals (which they denotedas 3 and 4) which are relevant when considering the lessons that can be drawnfor this impact assessment.

Counterfactual 3 where onshore TOs have their exclusive onshore

transmission licences extended offshore, and the offshore transmissionservices are included within the existing onshore price controlarrangements.

Counterfactual 4 where onshore TOs have exclusive onshore

transmission licences extended offshore , but a dedicated offshore pricecontrol (elements of which are fixed for longer periods than a standardprice control cycles) is applied to the offshore and offshore services.

CEPA took the financing and operational costs for OFTOs in all tender rounds todate, which are projected over the 20 years of an OFTO licence, and convertedthese into net present value terms (2014/15 prices) using the time preferencediscount rate of 3.5%. It then compared these to modelled estimates ofoperators possible operating and financing costs under the counterfactuals. Inthe following table the cost differences (as savings in favour of the OFTO regime)are expressed as a percentage of the total value of OFTO projects upon transferto the OFTO, after construction.27 These project values were also converted into2014/15 prices.

26

CEPA, Evaluation of OFTO Tender Round 2 and 3 Benefits, March 2016:

https://www.ofgem.gov.uk/publications-and-updates/evaluation-ofto-tender-round-2-and3-benefits27In its report, CEPA expresses savings as a percentage of project transfer value and as apercentage of the OFTOs tender revenue stream. We are using the former, as this gives aclearer comparison with the scenario analysis in this document.

31

Extending competition in electricity transmission: impact assessment

Table 5: Savings from the OFTO regime as a % of the value of projectsCounterfactual 3Financing savingsOperational savings

Counterfactual 4

11%

8%

18% - 25%

18% - 25%

26% - 34%

23% - 31%

Total net savings

Savings from financing and operations,minus costs of the tender process

South AmericaCompetition was used in South America to deliver a rapidly expanding electricitytransmission network a different context to the GB network, where the modelsused were different to the ones we are developing. They show, nonetheless, thatbenefits of competition have been realised in practice.We provided the context to these examples in our previous version of this impactassessment in March 2015 as part of the ITPR project,28 which was supported byresearch from Imperial College London and Cambridge University.29 We do nothave updated data on these examples for this update of our assessment, but noteour previous work for reference.

28

ITPR Final Conclusions, supporting impact assessment:

https://www.ofgem.gov.uk/sites/default/files/docs/2015/03/itpr_final_conclusions_impact_assessment_publication_final.pdf29Imperial College London and Cambridge University Electricity Policy Research Group,Integrated Transmission Planning and Regulation Project: Review of System Planning andDelivery, June 2013: https://www.ofgem.gov.uk/ofgempublications/52727/imperialcambridgeitprreport.pdf

32

Extending competition in electricity transmission: impact assessment

Appendix 2: Scenario cost breakdown

A full breakdown of cost calculations from scenarios in Chapter 4. All costs areshown in present value terms (2015 prices), in m to one decimal place.Table 6: Scenario group 1 cost breakdown